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Uncertainty shocks, inflation dynamics and monetary policy

Project description

Factors impacting price inflation

Despite a common monetary policy, Euro Area economies face an idiosyncratic degree of uncertainty. This stems both from country-specific developments and from shocks experienced by major partners such as the United Kingdom and the United States. The EU-funded UNMACRODYN project aims to study the macroeconomic dynamics in response to uncertainty shocks. It will explore how price inflation is affected by a country’s monetary policy. Two papers will be published, focusing on the American economy as the benchmark case and the Euro Area’s major economies. Research outcomes will serve as a reference for policymakers in carrying out monetary policy and managing the macroeconomic effects of uncertainty shocks.

Objective

This research project studies the macroeconomic dynamics in response to uncertainty shocks. The focus is on dynamics of price inflation and how it might change according to the stance of the monetary policy. The project aims i) to fill a gap in the macroeconomic literature, by delivering a conclusive interpretation of uncertainty shocks as either inflationary or deflationary, and ii) to provide a reference for policy-makers in conducting the monetary policy and managing the macroeconomic effects of uncertainty shocks. The research question is preeminent for the case of the Euro Area, where despite a common monetary policy, economies face an idiosyncratic degree of uncertainty, that is affected by both country-specific developments and shocks hitting the major partners, like the US and the UK. The research question will be investigated in two distinct papers, namely Paper A and Paper B, that aim to be published in international peer-reviewed top-field journals. Paper A will provide a theoretical analysis, i.e. DSGE model-based analysis, about the inflation effects to uncertainty shocks under different specifications of the monetary policy. Paper B will consider different time-series models to focus the data-implied response of inflation to uncertainty shocks under different degrees of monetary policy smoothing. For both papers, I will consider the data of the U.S. economy -as the benchmark case- and of the major economies in the Euro Area. The comparison with the U.S. case will be instructive on how the combination of heterogenous uncertainty and common monetary policy affects the dynamics of Euro Area country-specific inflation.

Coordinator

QUEEN MARY UNIVERSITY OF LONDON
Net EU contribution
€ 224 933,76
Address
327 MILE END ROAD
E1 4NS London
United Kingdom

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Region
London Inner London — East Tower Hamlets
Activity type
Higher or Secondary Education Establishments
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Total cost
€ 224 933,76